Thus, the bank needs money. This could have several
ramifications, including attempts to keep the yuan from
strengthening further against the dollar...and slowing
improvements in the US trade deficit.

NYT: [China's central bank] has been on a buying binge in the
United States over the last seven years, snapping up roughly $1
trillion worth of Treasury bonds and mortgage-backed debt issued
by Fannie Mae and Freddie Mac.

Those investments have been declining sharply in value when
converted from dollars into the strong yuan, casting a spotlight
on the central bank’s tiny capital base. The bank’s capital, just
$3.2 billion, has not grown during the buying spree, despite
private warnings from the International Monetary Fund.

Now the central bank needs an infusion of capital. Central banks
can, of course, print more money, but that would stoke inflation.
Instead, the People’s Bank of China has begun discussions with
the finance ministry on ways to shore up its capital, said three
people familiar with the discussions who insisted on anonymity
because the subject is delicate in China.

The central bank’s predicament has several repercussions. For
one, it makes it less likely that China will allow the yuan to
continue rising against the dollar, say central banking experts.
This could heighten trade tensions with the United States. The
Bush administration and many Democrats in Congress have sought a
stronger yuan to reduce the competitiveness of Chinese exports
and trim the American trade deficit.